FX in Slo Mo: Awaiting Fresh Impulses

The major currencies have been confined to narrow ranges, with only the Japanese yen showing much movement.  Yesterday's yen strength gave Tokyo operators a new and better selling opportunity.  

Both the dollar and euro have recovered nearly all the ground lost against the yen yesterday.  The news stream was light and the market continued to focus on the likelihood that the BOJ eases policy again in a couple of weeks.  

Meanwhile there is much market talk about a JPY86.75-JPY90.75 double no-touch option structure that is thought to expire in early March. Good Tokyo-based dollar bids, linked to importers, emerged near JPY86.80, helping defend the lower barrier.  On the upside, the North American session can take the greenback toward JPY87.80-JPY88.00.   For its part the euro held support near JPY113.50 and can retest the JPY115.00-JPY115.20 area near-term.  

Australia reported softer than expected retail sales and weak job vacancy data.   Retail sales fell 0.1% in November.  The consensus had expected a 0.3% increase after a flat October reading.   Job vacancies fell 6.9% in the three months through November, which is down from a +4.2% pace in the three months through October.   Although new homes sales were firmer (4.7%  from 3.6% in Oct), the poor consumption and employment data is seen as more important for the outlook for the RBA and, on balance, the data is encouraging speculation of a rate cut next month. 

The Australian dollar remains resilient and firmed to a new four day high just below $1.0525.  Although the Aussie has pulled back in the European session, look for it to be bid back to the highs in North America today, with potential toward $1.0550. 

The UK reported a slightly wider than expected trade deficit of GBP9.16 bln in November after a GBP9.49 bln shortfall in October.  The small improvement came from trade with the EU.  The BOE meets tomorrow and it is widely expected to stand pat.  There seems to be less conviction that another round of gilt purchases will do much good at this juncture.  Sterling looks comfortable in roughly $1.60-$1.61 range.  

The ECB meets tomorrow as well.  What is important is not how the regional economy is doing in absolute terms, but relative to what the ECB was expected and the weak performance is not surprising.  Although last month many board members wanted to cut rates,  the sense of urgency has passed.   

The transmission mechanism of the ECB's monetary policy appears to be working better.  Yields in Spain and Italy have continued to fall (11 and 18 bp respectively on 10-year bonds already this year) and the premiums over Germany have narrowed (27 and 34 bp respectively).  Anecdotal reports suggest some foreign investors are returning.  A Bloomberg poll found that a vast majority of the those surveyed do not expect the ECB to cut rates tomorrow (42 of 45).   Draghi's press conference that follows will again attract most of the attention. 

The German economy has lost some of its sizzle and stalled or contracting slightly in Q4.  Consider that yesterday's data included news that German exports have fallen 2 of the past three months through November and 3 of the past 5 months.  Germany, like Sweden, Switzerland and China export about 40% of GDP.  The slowing of exports filtered into yesterday's reported weakness in factory orders (-1.8% in November and are down 1% year-over-year) and into today's industrial output report (0.2% increase in Nov compared with expectations of a 1% increase.  The year-over-year pace has not been positive in the second half of last year. 

Lastly, note that Poland's central bank is widely tipped to deliver another 25 bp rate cut today, following rate cuts in November and December.   Nor is this rater cut expected to be the last in the cycle.  The difference between the hawks and doves appears to be the difference of 50 and 100 bp more in easing.    The euro held support near PLN4.05 last week, which is the lower end of the 4-month range.  There is potential toward PLN4.15 and the 200-day moving average comes in near PLN4.1650.